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On
Discovery Communications
' popular TV reality show Gold Rush, guest prospectors endure harsh conditions in remote parts of the world to try to strike it rich. The cable-TV network's experience could serve as a guide: It's carefully picked channels all over the globe, assuring many years of good returns.

Founded by John Hendricks in 1985, and funded by heavyweights like John Malone of
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and the Newhouse and Cox families about 25 years ago, the cable operator's original brief was to grab channel space and create a presence in key emerging and developed markets. Its sometimes quirky nonfiction content features science, animals, and technology, which don't require a lot of translation to travel to new markets. That's helped Discovery (ticker: DISCA) become the No. 1 global cable player, with an average of eight channels in 220 countries, far exceeding competitors. Its flagship Discovery Channel, offering inexpensive fare like Shark Week and Fast N' Loud, is the most widely distributed pay-TV channel in the world.

CEO David Zaslav has created programming that's trying to take full advantage of Discovery's global distribution capabilities.
Melissa Golden/Redux

It's these overseas sales that should provide Discovery, which includes the Animal Planet and TLC channels, with the firepower to continue its ascent. The number of foreign subscribers to cable TV is growing at a double-digit rate, which is expected to push Discovery's annual earnings 20% higher in the next few years. As more foreign customers sign on for the same channels, revenue and margins grow.

"The big secret sauce we have is there's a lot more growth ahead of us outside the U.S.," CEO David Zaslav tells Barron's.

This boost also should help hold the attention of shareholders wondering if the rise of Discovery's U.S. shows has peaked. Barron's wrote positively about the shares four years ago ("King Crabmen, Meet the Queen of Television," Nov. 23, 2009) when they were at $31.64. Although they've come off the all-time high of $89 hit this past October, they traded last week at $85.83, up 171% since our story. That works out to 21 times next year's earnings estimates of $3.96 a share. Yet bulls like analyst Todd Juenger of Sanford Bernstein say Discovery shares are like a U.S. movie hit that's just starting to open in theatres abroad; there are more box-office gains to come. He thinks the stock could rise by 20% to $103 within 12 months.

Discovery, which owns and produces all its content, also is pushing hard to capitalize on its foreign distribution by boosting spending on international programming by more than 80% since 2010, according to Zaslav. One result is Ultimate Shopper, a show about fashionistas competing on style. Discovery is particularly interested in attracting middle-class viewers in Latin America and Asia.

Unlike many global companies, Discovery is enjoying solid returns from Europe, which is just starting to become accustomed to pay TV. Ad revenue there is growing 15% to 20%, despite near-recession conditions. "Western Europe has a chance to be the new emerging market," says Zaslav, who was hired in 2007 to create more content.

Discovery last year bought SBS Nordic, a suite of 12 Northern European TV networks, for 1.3 billion euros ($1.75 billion), as well as a 20% stake in the Eurosport network from TF1 for $221.6 million. "When the economy does turn, we're going to do very well," Zaslav says.

The Bottom Line

Discovery Communications' shares have room to hit $103 in the next year based on continued double-digit growth in its profitable overseas business

International revenue grew 18% in the third quarter, excluding newly acquired businesses and currency changes. That compares with 10% growth for the still-healthy U.S. networks. In 2012, foreign networks contributed 37% of Discovery's $4.49 billion in revenue, and U.S. networks 61%; the remaining 2% came from its education unit. Bernstein's Juenger estimates that international operations will account for more than half Discovery's network revenue by 2016.

THAT SHOULD MAKE investors happy. Earnings are expected to grow in the mid-to-high 20% range this year and next (see table below for 2014 growth estimates), far outpacing competitors' average of about 18%. This year analysts forecast revenue will grow 23%, to $5.63 billion, and earnings per share 22%, to $3.06. Discovery is expected to buy back $1.4 billion of stock this year, though it doesn't pay a dividend.

The strongest growth may come from abroad, but Discovery isn't standing still in the U.S. Zaslav has increased spending on shows to $1.5 billion this year from $500 million seven years ago. That has helped Discovery to boost its market share of U.S. cable viewers, to 11% from 7% in that time. It's also brought us Here Comes Honey Boo Boo (TLC) and Finding Bigfoot (Animal Planet). And its joint venture with Oprah Winfrey, the OWN channel, will contribute to Discovery's net income for the first time in the fourth quarter.

The price-earnings ratio of 21 doesn't worry Juenger. He expects Discovery's earnings to hit $5.03 a share in 2015, from 2013's $3.06, and doesn't think 21 times earnings (a $103 share price) is too much to pay for that growth. Looked at another way, using price/earnings growth ratio, which compares the P/E to the earnings growth rate, Discovery trades at 0.66 times, versus 1.0 for its peers.

Discovery seems to have hit on a winning story formula. "It's rare to find a content model that's inherently inexpensive at the same time that it's globally appealing and interesting to human beings," says Juenger. That includes investors, too.